EUR/USD May Dip Below 1.3600 Amidst Soft European Data, Thin Trading

[B]Euro-zone Retail Sales (MoM) (MAY) (9:30 GMT; 5:30 EST)[/B]
[B]Euro-zone Retail Sales (YoY) (MAY) (9:30 GMT; 5:30 EST)[/B]
[B]Expected: 0.0%[/B]
[B]Expected: 1.7%[/B]
[B]Previous: 0.2%[/B]
[B]Previous: 1.6%[/B]

[B]How Will The Markets React?[/B]
While European markets are typically keen to tune into the release of Euro-zone retail sales, this Wednesday presents unique conditions for forex traders. With the US on holiday, liquidity could be inordinately thin, which tends to lead to absolutely dead price action or unexpectedly large spikes in volatility as institutions try their hand at running stops. Nevertheless, it is worth noting the risks associated with the retail report. Retail sales in the Euro-zone are anticipated to go unchanged during the month of May, though the annual rate of growth is estimated to hit 1.7 percent. However, the figure out of Germany - the Euro-zone?s largest economy - unexpectedly plunged 1.8 percent during the same period. This result was far worse than the expected 0.3 percent decline and signals that consumption throughout the region may have taken a greater than predicted hit. Nevertheless, with the European Central Bank scheduled to announce their rate decision on Thursday, traders may be hesitant to enter positions, especially in European fixed income and equity markets, which may only lead to tight range conditions.
[B]Bonds - 10-Year German Bund Futures[/B]
For the past few weeks, 10-year German bunds have slowly ascended as risk aversion permeated throughout the markets. However, Fibonacci resistance at 111.47 has limited some of those gains as bunds ended the day down at 110.85 with yields up 6bps at 4.625 percent. While the looming ECB rate decision on Thursday is widely expected to be a non-event, markets may still be hesitant to take positions on Wednesday in order to trade Euro-zone retail sales. However, with some risk that the figure will actually be released much worse than predictions, there is a chance that bunds will climb higher once again. Nevertheless, given the bearish decline seen on Tuesday, bunds may be more responsive to a hot retail sales report.
[B]10-Year German Bund Futures (Daily Chart)[/B]
Since rebounding from the 1.3300 level, EUR/USD has been targeting the record highs achieved a little more than two months ago as the US dollar has softened and the ECB has continued to issue hawkish rhetoric. Will the pair be able to take on new record highs above 1.3680? There are a few factors to consider: first, volumes will be relatively thin on the July 4th US holiday, making price action susceptible to holding tight ranges. Second, the US dollar faces huge event risk on Friday when US Non-Farm Payrolls will be released. While the ECB meeting on Thursday does present event risk as well, the central bank is not anticipated to raise rates within the next few months, let alone this week.
However, we have seen large institutional traders in the past take advantage of such thin conditions. How will they play it this time around? It is possible that EUR/USD could be bought up to test the 1.3680 level, with price pushed high enough to trigger stops near 1.3700. The case for this may be furthered if Euro-zone retail sales hit the tape better-than-expected. On the other hand, estimates for the release are set at an unchanged pace for the month of May, but dismal retail sales for the same period from Germany signal that the Euro-zone figure could actually be quite worse. As a result, EUR/USD could be pulled back below 1.3600, but the moves may only be temporary given the aforementioned risks looming on the horizon.
[B]EUR/USD (Daily Chart)

[B]Equities - Xetra DAX 100 Index[/B]
German stocks climbed on Tuesday, sending the DAX Index up 1.2 percent to 8,050.68, the highest in almost two weeks. Siemens AG rose 3 percent to 109.64 euros after Lehman Brothers increased its price estimate for shares of the company. Meanwhile, Deutsche Boerse AG gained after the operator of the Frankfurt bourse said trades increased in June, sending shares up 1.9 percent to 85.99. SAP AG retreated 2.1 percent to 37.19 euros after the software company admitted that it has made “inappropriate” downloads of Oracle Corp. code, responding to a lawsuit that claims the German company stole programs from its competitor.
The German DAX index has maintained a steady uptrend after plummeted in late February, and price has recently tipped back above 8,000. However, with the recent highs hovering above near 8,130, do German equities have enough strength behind them to push the benchmark index above the resistance level? With the European Central Bank meeting on Thursday, traders may be hesitant to enter positions, which could leave price action within the DAX relatively stagnant even on the release of Euro-zone retail sales on Wednesday. However, since the ECB is anticipated to leave rates steady without signaling a hike next month, German equities may stand a better chance of racking up gains.
[B]Xetra DAX 100 Index (Daily Chart)